I see you’re the president’s honcho for health reform, which suits me fine. Your goals are universal coverage and cost efficiency, delivered through some of the private channels already in place. But when the health-insurance companies lobby for a piece of the pie, keep in mind their unique contribution to making a bad situation worse.
Much of this industry has been plotting to dodge the true “insurance” business. Instead of accepting everyone and spreading the risk, they’ve chosen to force people out of the system when they fall sick.
Among their nastier tactics is a method of pricing insurance policies best described as a “death spiral.” This helps explain why the price of an older policy can jump by 30 or 50 percent at a time when medical costs are rising by less. When you check it out, Hillary, here’s what you’ll see:
Americans who buy individual policies (or one-person “group” insurance) join a pool of people who are sharing risks. In any year, the healthy members hold down the rates for those who get sick. What makes a pool work is a constant infusion of new members. They’ve just passed a health test, so they’re the least likely to make claims.
But most individual health insurers don’t keep their pools open to new blood. After 12 to 36 months, they may close the pool and start a new one, issued on a new policy form. As the people in the older pool age, the number and size of their claims increase. To cover those costs, the insurer jacks up premiums at a rapid rate.
Pretty soon, the healthy people in the plan start dropping out, often switching to the same insurer’s new and cheaper pool. That’s when the death spiral begins. Those left behind are in poorer health, which drives up the premiums even more. Soon, even some people with health problems leave because they can’t afford the price. This swells the ranks of the uninsured. When the pool becomes unprofitable, because even its high rates don’t cover enough of the medical claims, it may be canceled altogether. A similar process can affect small-group insurance.
People try to beat this game by buying new and cheaper medical policies every couple of years-providing, of course, that they pass the physical. But one day, they or a member of their family may develop a medical condition that prevents them from switching. At that point, their personal death spiral starts.
MidAmerica Mutual of Minneapolis has taken some of its policies all the way. In May 1991, it announced the cancellation of three pools covering about 1,800 people and urged its agents to sell new policies to all the healthy cancellees. Health standards were eased, and more than half of them are still with MidAmerica, says the company’s attorney Melissa Miller. But what happened to the rest?
Golden Rule Insurance of Indianapolis closes its pools every couple of years. Someone who bought in 1982, and isn’t healthy enough to switch, may now be paying 65 to 90 percent more than someone of the same age coming in new. Chairman J. Patrick Rooney says he’s working on a program to limit the gap to 70 percent-but if you check other insurers, Hillary, you will see that’s still a lot.
People who buy insurance only for a year or two will like Golden Rule’s low upfront rates. But those who need coverage for many years may find themselves trapped in a plan they eventually can’t afford. Rooney argues that even at the higher price, Golden Rule’s older policies are competitive with the new ones issued by other health insurers. But a quick comparison with prices at Time Insurance Co. of Milwaukee suggests that Rooney isn’t right.
At Time Insurance, pools also close every couple of years. But the company doesn’t death-spiral, says senior vice president John Krick, because long-term policyholders are charged only 10 to 20 percent more than new buyers pay. What defines a spiraled policy? According to Jonathan Shreve of the actuarial firm Milliman & Robertson, you’ve got one if your rates are rising by significantly more than the trend rate of total medical costs and claims-now running in the area of 13 to 15 percent annually.
Pools also close when a company stops selling individual coverage-as did Travelers, Equitable and Aetna. The Aid Association for Lutherans quit this year. “We couldn’t find a way to keep this insurance affordable,” the company’s chief health actuary, Jon Stellmecher, says.
It’s hard to find a company that doesn’t continually close pools. There’s only a handful: Principal Mutual in 44 states, John Alden Life in 38 states, American Community Mutual in 7 states and Blue Cross/Blue Shield. Before buying any policy, consumers can ask for a price history of the company’s current and previous policy forms (the insurers have it but might not produce it).
Insurance agents earn commissions-in the 20 percent range–every time a customer hops to a new health-insurance policy. But rapid switching “was destroying my credibility,” complains agent Jim Buck of Advantage Insurance Services in St. Petersburg, Fla., who quit selling companies that continually close pools. Agent Paul Lonigro of Group Insurance Analysts in Lakewood, Colo., won’t write policies whose new rates are low while rates on older pools “go through the ceiling.”
As for a cure, there are lots of ideas. Joseph Pugh of Gulfport, Miss., head of the National Association of Health Underwriters, wants segmented pools to be restricted. Wyoming narrows the price gap between old and new policies. Starting in April, insurers in New York will have to charge everyone alike. What’s frustrating, Hillary, is that these fixes tend to raise rates for healthier people. But if the answer were obvious, you’d be doing something else.
I come back to basics. There’s something wrong with a health-insurance business that takes you when you’re well while contriving ways to dump you when you’re sick. Insurers argue that healthy people shouldn’t much subsidize the rest-but that’s just what insurance is supposed to do. Those of us who are well help the ill today, so that we can be helped tomorrow. One of your biggest jobs, Hillary, will be forcing the industry to this truth.
Cheers and good luck. Jane
